Exam 16: Investing Assets

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $540,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $493,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $528,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $638,000. What is the gain that is reported on the sale of Bloomberg Corporation in 2019?

Companies report securities based on a fair value hierarchy in which Level 3 is the most reliable estimates of inputs used and Level 1 fair value input estimates require the most judgment.

Which of the following would not be disclosed for held-to-maturity securities?

Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/19. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/19 was 4%. How much Interest Revenue will Trader Trust record on this note in 2019?

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What is the present value of this note at inception

A company can choose the fair value option for reporting some assets, while choosing to report other assets at cost.

What factors should be considered when deciding whether an investor has significant influence over an investee?

On 1/1/19, Lantana Loan Co., a calendar-year company, accepts a 6%, $300,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payments and repay the full $300,000 at maturity. What is the amount of discount amortized and the amount of Interest Revenue recorded on 6/30/19, the date of the first interest payment? (Round any intermediate calculations and your final answer to the nearest dollar.)

Under the equity method, the investor decreases the value of the investment when it receives cash dividends.

Pepper Company owns 40% of the common stock and exercises significant influence over Salt Company. Pepper Company ________.

For securities classified as available-for-sale, what do companies disclose in the notes to the financial statements?

For equity securities where the investor does not have significant influence, and the equity has a readily determinable fair value, realized gains/losses are reported in net income.

Grey Co. holds a held-to-maturity debt investment at an amortized cost of $50,000. At 12/31/18, the fair value of the investment is $49,000 and the present value of the future cash flows is $48,000. Has an impairment loss occurred? If so, how much is the impairment loss to be recorded?

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the note balance at December 31, Year 1?

For companies with equity investments, IFRS requires disclosure of summarized financial information of the investee, including the amounts of total assets, total liabilities, revenues, and net income (loss).

Investments in equity securities whereby the investor does not have significant influence over the investees require ________ percentage of ownership in the investees.

Brightney purchased common shares of Company A and B for $7,000 and $12,000, respectively on 12/15. Brightney intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Brightney does not have significant influence over the investees. Assuming an existing $1,100 debit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported?

When a note's stated interest rate is less than the market rate, the note is valued at a premium.

The fair value option improves financial reporting by enabling entities to offset volatility in reported earnings. How is this accomplished?

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except ________.